Goldman Sachs and the Decline of Wall Street

There is more proof that America’s center of power is moving from Wall Street to Silicon Valley. A data-driven technology company is accumulating far more cash and revenue, than a famous investment bank.

Revenues at America’s most prominent investment bank; Goldman Sachs Group (NYSE: GS), fell by $4.28 billion during the first quarter of 2016. During the same period revenues at Alphabet (NASDAQ: GOOG); the company formerly known as Google, rose by $3 billion.

Goldman Sachs reported $29.54 billion in revenues on March 31, 2015. That was down from $33.82 billion in December 2015 and $35.82 billion in March 2015. Goldman Sachs’ revenues have declined by $6.28 in year. It looks as if the revenue decline at Goldman Sachs is part of a long standing pattern.

Revenues at Alphabet (GOOGL) rose from $74.99 billion in December to $77.99 billion in March. That growth is part of a long stand pattern, Alphabet’s revenues increased by $10.15 billion in a year; rising from $67.84 billion in March 2015 to $77.99 billion in March 2016.

Wall Street’s decline on Display at Goldman Sachs

Naturally many value investors will smell opportunity here, because companies with declining revenues can generate a lot of cash. Goldman Sachs still displays some very interesting numbers from a value investors’ standpoint; it reported a dividend yield of 1.67%, a return on equity of 5.75%, a profit margin of 17.91% and a diluted EPS of 8.831 on March 31, 2016.

Yet the bank is suffering a significant decline in income. Its net income fell by $1.713 billion during the first quarter of 2015, dropping from $6.083 billion in December 2015 to $4.37 billion in March 2016.

What’s worse is that Goldman Sachs lost more than half of its net income between March 2015 and March 2016. The bank reported a net income of $9.288 billion in March 2015 that fell to $4.37 billion in March 2016. That’s a decline of $4.918 billion and it appears to be accelerating.

Goldman Sachs is losing a Lot of Money

Goldman Sachs net income has been falling by around $1 billion for in every quarter since March 2015. It dropped from $9.288 billion in March 2015 to $8.299 billion in June, $7.484 billion in September, $6.083 billion in December and $4.37 billion in March 2016.

What’s even scarier is Goldman Sachs’ cash from operations, it lost $3.71 billion in cash from operations during the first quarter of 2015. That’s a $10.671 billion decline from December when the bank made $6.961 billion in cash from operations.

It looks like Goldman Sachs is losing money from investments and has been for a while. Last year in June 2015 it a negative cash from operations figure of $5.06 billion, in March 2015 in contrast the bank made $3.33 billion in cash from operations.

Goldman Sachs is making a Lot of Money

 Despite those numbers Goldman Sachs; could be a good investment because it is making a lot of money from cash from financing. Goldman Sachs reported making $37.2 billion in cash from financing during the first quarter 2015.

That was an $8.08 billion increase from December 2015 when Goldman Sachs made $29.12 in cash from financing. It was a $20.91 billion increase over first quarter 2015 when Goldman Sachs made $16.91 billion from financing.

These numbers indicate that Goldman Sachs’ banking and lending operations are a cash cow that rivals Google’s advertising business. The company is now making more money from financing than from its operations and that number is growing significantly.

The problem is that the financing is not translating into income. Goldman Sachs actually reported a free cash flow of -$4.505 billion for the first quarter of 2015.

Goldman Sachs has a lot of Float

What is truly fascinating is that Goldman Sachs’ revenue and income may not matter because of the vast amount of float that it has.

Goldman Sachs reported $79.17 billion in cash and short term investments on March 31, 2016. That was more than Alphabet which had $75.26 billion in the bank on the same day and Berkshire Hathaway (NYSE: BRK.B) which reported $58.34 billion in cash and short term investments on March 31. 2016.

What’s more interesting is that Goldman’s bank account has been growing dramatically over the past year. The company reported $75.11 billion in cash and short term investments for fourth quarter 2015, $65.58 billion in September 2015, $60.84 billion for second quarter 2015 and $63.13 billion in March 2015.

Goldman Sachs’ cash and short-term investments grew by $16.04 billion between March 2015 and March 2016. The same numbers increased by $4.3 billion during first quarter 2016.

It looks as if Goldman can greatly increase its float without increasing revenues. It also looks as if Goldman Sachs could soon be in a position to make a major acquisition; perhaps it plans to buy a consumer bank, or a tech company.

Goldman Sachs could be a Bargain

My take here is that Goldman Sachs is significantly undervalued; even though it was trading at $155.34 a share on May 13, 2015. On the same day, ycharts reported that the bank had a market cap of $64.53 billion and an enterprise value of $249.59 billion. It also had assets of $878.04 billion on March 31, 2016.

If you are looking for a stock that could grow and generate a nice dividend, Goldman Sachs could be your ticket. Although it is not for the faint of heart; Goldman had $791.2 billion in liabilities on March 31, 2016, and its liabilities did grow by $16.53 billion during the first quarter rising from $774.67 billion in December 2015.

It looks as if Goldman Sachs is taking some serious risks but it looks as it has enough cash to survive the decline of Wall Street. Even as Wall Street declines; and Silicon Valley rises, Goldman Sachs is still a good investment for those with a lot of risk tolerance. Although it is definitely not a classic value investment like Alphabet is.